HOW TO TAKE A MORE DYNAMIC APPROACH TO PROFITABILITY

Kirsty MacCormick

Following the challenges faced by spas over the past two years, we have all learnt to be more creative and dynamic in the way we drive revenue and operate our businesses. Profit margins have never been so dissected and crucial to our survival. In some cases, we have had to look at altering our business models, many of us selling online and generally becoming more commercial. For those of us whose interests have survived or even thrived, this has resulted in us operating more dynamic, profitable and successful businesses.

Menu engineering

In the Spring 2022 edition of European Spa we discussed using an annual yield technique called menu engineering to determine which treatments give us the highest profit margins. First, we need to segment our offer according to volume of sales, treatment duration and profitability. Then we can start planning what services to offer during peak hours – usually the ones with the highest profit margins unless you have a seasonal or promotional offering.

We need to identify the products most beneficial to a spa by segmenting services according to volume of sales (popularity) and the cost of sale (profit margin). The four menu engineering categories are ‘Stars’, which demand strong and high margins; ‘Plow Horses’ requiring strong and low margins; ‘Puzzles’ with low demand and high margins; and ‘Dogs’ with low demand and low margins.

Dynamic availability

Profitability is optimised by offering treatments with the highest margin during high-demand times. This way a spa can easily increase its overall profit margin without significant changes. This yield technique, known as dynamic availability, can be a very effective approach to increase profit for a spa by replacing low-margin sales with higher-margin sales during peak hours.

Beside the dynamic availability of different categories, it’s important to also manage the utilisation of spa resources and facilities that can support various services.

Kirsty MacCormick, founder, The Spa Consultancy

Although it is possible to implement a dynamic pricing strategy based on the level of demand, customers may not always understand why the price for a specific treatment fluctuates. They may consider a higher price, during peak demand periods, as an unfair price difference. Should we expect them to pay more for a treatment just because it’s at a peak time or maybe we should add value, perhaps by offering 90 minutes for the price of 60?

Discount strategy

Discounting is currently one of the most hotly debated topics in the spa industry, intensified by a challenging economic climate that makes it increasingly appealing to businesses. Often criticised for failing to create a loyal, long-term customer base, the application of discounts as part of a yield management strategy is also questioned.

In most markets the spa offer often exceeds demand, with managers frequently discounting to fill empty treatment rooms. The published rate is set based on the highest demand level, with discounts applied during periods of lower demand. It seems this is a much more accepted and more fair approach to dynamic pricing.

This can become a ‘discount strategy’, but is it the best way to position your business? Do you want to give the consumer this image of your spa? While discounting is an easy way to attract extra demand, it is only a short-term solution and can have a negative impact on the consumer’s value perception of your treatments and services.

The way to implement different price levels for similar treatments is by applying conditions associated with the price to justify supplements. You should develop both physical and non-physical hurdles. Physical hurdles include the location of the treatment room, the type of treatment and related services. Non-physical rate hurdles include the time of day or day of week, the length of treatment, membership of the spa, and late bookings versus advance reservations.

Forecasting and software

One area of revenue management often overlooked within spas is forecasting. Forecasting demand as well as BOB (business on the books) on a weekly, monthly and quarterly basis is essential in any spa operation and allows you to schedule better to achieve optimal staffing at peak times.

Another essential tool to help spas analyse and understand their customer base is a spa management software system, which will allow spa managers to set up a revenue management policy to help them analyse spa statistics. A toolkit to help you thrive

Key strategic planning tips for maximum profitability

Menu engineering: Segment your treatment menu into four categories based on popularity and profit

Dynamic availability: Only offer your highest profit treatment at peak times

Discounting: Add value instead of discounting to gain loyalty and positioning

Forecasting and spa management software: Forecasting is essential to ensure you have the correct resources and availability at the right times, while the latest software is crucial for any spa manager to operate an efficient and profitable spa operation.

www.thespaconsultancy.com

With over 30 years’ experience in the spa and wellness industry, Kirsty MacCormick is the founder of The Spa Consultancy. Her expertise includes development, pre-opening project management and operational set up of a range of spas from commercial hotel and day spas to luxury five-star wellness destinations.